July 30, 2013

Obama's Corporate Tax Reform Plan Is Short on Details

Ah, the rush of having the ear of the President of the United States. A few weeks ago, for the magazine’s package of suggestions for Barack Obama to resuscitate his second term, I wrote the following:

When Americans are brimming with resentment at the IRS, why not seize the moment to overhaul the bloated, incomprehensible, unfair tax code? Granted, tackling personal income taxes is probably unrealistic so soon after the fiscal-cliff deal raising rates for the wealthy. But when it comes to corporate taxes, there’s a real opportunity, since Barack Obama and other Democrats are willing to accept revenue-neutral reforms (a requirement for Republicans).

And what does Obama do today? He gives a big economic speech in Chattanooga (after visiting an Amazon warehouse, of all places) centered on a proposal for…corporate tax reform. Basically, I’m expecting the call to be nominated for the Fed chairmanship any minute now.

Actually, I’m not, because what Obama laid out today differed in some key respects from what the magazine proposed. For one thing, Obama’s plan is not exactly revenue neutral: it anticipates an initial surge of additional revenues in the adoption of the plan, while remaining vague on whether it anticipates higher revenues on an ongoing basis. (Jared Bernstein, a former economic adviser in the administration, asserts in his assessment that the plan is revenue-neutral beyond the initial expected uptick.) And for Republicans, that the plan raises any revenue whatsoever—which Obama proposes putting toward infrastructure and school modernization, community colleges and manufacturing institutes—is enough to make it unacceptable. “If he’s looking for tax reform, leaving out individual taxes is giving up on what many would see the most important piece. And if he’s looking bipartisan consensus by doing only corporate tax reform, but then making it revenue raising, that doesn’t seem to be moving the ball forward,” said Len Burman, a tax expert at Syracuse University who helped shape the 1986 tax overhaul. “To be honest, I can’t figure out what he’s thinking. I have no doubt he’d like to get some tax reform, but I think this is just another hook for talking about his jobs agenda.”

With that in mind, I’ll attempt a quick assessment on the merits, but even that is easier said than done, because for those wanting to wonk out on the plan, the White House offered precious little detail. As Obama has proposed before, the plan calls for lowering the corporate tax rate from 35 to 28 percent and making up the lost revenue by eliminating or reducing many of the credits and deductions that businesses use to get their rates far below 35 percent today. But the plan does not specify which of those credits and incentives it would target above all, and by how much—whether the depreciation credit for capital investments, the treatment of interest, etc. It calls for an even lower rate, no more than 25 percent, for “manufacturing,” but does not specify how that would be defined to avoid the comically overbroad application for the manufacturing incentives that exist in the code today, which are claimed even by hamburger-makers. It promises simplification and investment incentives for small businesses, but does not reckon explicitly with the biggest objection to this general reform approach that we’ll hear from the executives at the many businesses (including some quite large ones) that now organize themselves as limited liability companies and “S-corps” rather than corporations and are thereby taxed at their owners and partners’ individual tax rates rather than corporate ones: that they’ll get hit with the loss of credits and incentives while not being able to benefit from the lower rates.

This is why, ideally, corporate tax reform would be done in concert with individual tax reform; that doesn’t mean it has to be, given that the debate over individual tax rates is even thornier today, but any corporate tax reform plan does have to head off this line of opposition. “I would expect this proposal to create big winners and big losers in the corporate world,” said Kimberly Clausing, a tax expert at Reed College.

The plan is both most intriguing and confounding when it comes to the question of how to address the burgeoning billions in profits held offshore by U.S. multinationals under the current system, which in theory requires profits overseas to be taxed under the U.S. corporate rate when they are repatriated but in practice allows for indefinite deferral. Obama seems to be embracing an enticing proposal floated recently by Rutgers’ Roseanna Altschuler and the Treasury Department’s Harry Grubert, to impose some sort of minimum tax on the profits earned (or attributed) abroad by multinationals—a rate lower than the 35 (or 28) percent one for domestic earnings but higher than the zero rate that some companies (cough, Apple) are now paying on billions tucked away in havens like Ireland. There are problems with this approach, too—for one thing, it’s tricky for countries to go it alone on adopting the minimum taxes, since companies would then be tempted to pull up stakes entirely and incorporate their headquarters in countries lacking the minimum tax.

The bigger question left unanswered in the administration’s plan is how it would handle the transition to such a minimum tax: what of the billions in past profits sitting deferred? Many multinationals are pressing for a repatriation holiday that would allow them to bring that money back and, they say, invest it in the U.S. – a nice idea if it had actually worked out that way the last time it was done. Dave Camp, the Republican chairman of the House Ways and Means Committee, has been talking about a one-time fee on those repatriated profits – again, much lower than 35 percent but more than zero. Is this what the White House has in mind? It seems to be, but it’s not saying so outright, which is odd, given that there’s room for bipartisan agreement on this particular point (though Camp would use the money to lower overall rates even more than the administration has in mind, to 25 percent). “It’s mystery money -- we don’t know,” said the Urban Institute’s Howard Gleckman, who wrote a critical post on the new Obama proposal.

All we know is that the White House is assuming some sort of revenue surge at the outset of its reform—“the money from transitioning to a simpler tax system,” as Obama put it in Chattanooga—to pay for the rest of its jobs plan. It knows full well that that’s enough to turn most Republicans against the plan, which may be why it hasn’t given the rest of us more information on which to vet a proposal that has its merits but falls short of the serious offering the moment calls for. Not exactly what the magazine ordered.

Alec MacGillis is a New Republic senior editor. Follow him @AlecMacGillis.